Initiative Supports Diversity, Drives Efficiency

The consumer packaged goods industry is buzzing with news of a major commitment by Kraft Foods to support minority-owned suppliers. That commitment is based on a far-reaching joint initiative by Adhesives Systems Inc. (ASI), Henkel and Kraft. Kraft Foods has committed to source the majority of the adhesives used to package its food products in North America from minority-owned and operated adhesive manufacturer ASI and global adhesive technologies provider Henkel.

The arrangement is unique because Kraft Foods will request both up- and down-stream vendors to attain sustainable social, economic, and environmental objectives. Not only does the initiative support a diverse work environment, it is expected to enhance efficiency within Kraft Foods’ supply chain, improve procurement processes and deliver cost savings.

Jerry Perkins

Multiple Benefits

The ASI-Henkel alliance was originally formed in 2008 to better serve the increasing demand for an adhesives supplier that could provide innovative technologies, cost savings, and sustainable products while reflecting the diversity of the marketplace. The partnership was inspired not only by each company’s commitment to making diversity a priority, but also by a strong customer desire to make diversity in the supply chain more of a priority as well.

“The alliance was formed to provide the best of both organizations to companies like Kraft that want to increase their spending with minority-owned companies while at the same time accessing a broad range of adhesive products, high-level technical support and a footprint that would serve them wherever they have plants,” explains Jerry Perkins, senior vice president and general manager of Henkel’s Industrial Adhesives business. “The combination of our two companies created that kind of offering.”

According to George Hill, chairman and CEO of ASI, “We both have technology and laboratories, and create products. We’re two separate companies, each with our own portfolio of products and each with our own R&D efforts. But it’s a collaborative effort. Henkel has more products than we do, and we needed a global partner.” The Henkel-ASI alliance includes established protocols for entering into distribution, license and other agreements that will enable ASI to manufacture and/or distribute certain Henkel products while receiving technical and other support from Henkel.

Hill says that the alliance is exciting because it allows ASI to expand its reach in terms of products and geography. “There is no question that to be aligned with Henkel with their capabilities in terms of products, leverage, size and experience is almost a perfect synergistic relationship,” he says. “Their size and reach coupled with our agility and innovation is a perfect marriage.”

Hill and Perkins both point out that ASI is and remains a competitor of Henkel and its predecessor, National Starch and Chemical. “We had customers who knew what both companies were capable of,” says Hill. “What many didn’t know was the scope, scale and vision that this alliance could have.”

Recognizing the Potential

“Kraft has a strategic interest in growing their diversity spend and improving their purchasing and supply chain activities, and all three companies realized that the alliance was a good fit,” Perkins says.

Hill agrees. “The value system embodied in this initiative is a loop in which all parties have a philosophy and experience with diversity that contributes,” he says. “The relationship between the three companies has developed with time and trust.”

The scale of the proposed agreement with Kraft Foods will be significant and is expected to go well beyond simple diversity spend to deliver significant procurement and production efficiencies. “One of the things ASI and Henkel do in serving our customers is to help them simplify the portfolio of adhesives they buy,” Perkins says. “When you consider the diversity of packages, it’s an enormous sea of packaging concepts. There is a lot of innovation, a lot of development, and lot of new demands on the components that go into the packaging, whether it is films and different paper substrates or the adhesives themselves. So the adhesive category is very fragmented, and some of our customers buy far too many adhesives. Their adhesive portfolio is too complex. Most of our customers are very keen on having us help them technically reduce that complexity.”

“Not only will we reduce the complexity of their supply chain, we will reduce the number of adhesives they use,” says Hill. “Kraft Foods probably uses 80 or 100 adhesives, and we are confident we can reduce that by 70-80%.”

Querag Cho, senior chemist at ASI, tests the structural integrity of a new product on an Instron tester.

Combining Consistency and Innovation

Perkins points out that implementing a harmonized and simplified adhesive product line will provide additional benefits. “Kraft Foods will get consistency and enhanced quality,” he says. “A second dimension is innovation. Kraft Foods wants ongoing innovation for their packaging, and they want an adhesive supplier that can support their objectives in that area. We will deliver innovative new adhesive technologies that allow Kraft Foods to introduce new packages that are stronger in terms of consumer convenience, functionality and waste reduction. A lot of the technology we will implement for Kraft, such as our lower temperature adhesives, consume far less energy, and that too has great appeal to Kraft.”

Of course, Kraft Foods has very stringent demands with respect to the packages it produces, which represent its brands prominently on the shelf. “Kraft demands that its packages maintain or enhance the equity of its brands,” says Perkins. “We can help them with a strong technical adhesive alliance in taking an overly complex adhesive portfolio and paring it down to exactly what they need. When we do that, they will reap all kinds of efficiencies.”

According to Hill, that is only the beginning. “The initiative opens an entire array of additional opportunities for Kraft, Henkel and ASI,” he says. “We will be involved with Kraft business units in a way that will bring great value to their supply chain.” Hill pointed out that adhesives are normally the last consideration in the packaging process, and they are the least expensive in terms of percentage expenditure on the package itself. “But just think what happens when you coordinate the corrugated suppliers and the carton suppliers and the contract manufacturers and the suppliers upstream doing work on flexible packaging and pressure-sensitive applications. The synergy between adhesives and all the other factors-the equipment, the substrates, the carton and packaging suppliers-becomes dynamic.”

“Of all the supply chain partners, we are the last thing that goes in the package before it goes out the door,” Hill continues. “So our involvement and insight into all those factors is invaluable in reducing costs and improving efficiencies. We’re talking about innovations in developing new products, productivity in terms of the number of cases and cartons, cans of coffee, bars of candy, or whatever coming through the system. Certainly we’ll reduce simple transaction costs and suppliers, but it’s a much bigger picture than that.”

The Strength to Implement Change

Implementing such far-reaching change takes technical expertise and global strength. Kraft Foods’ machinery will have to be factored in, because, depending on the packaging type and the plant, a variety of machines will be running. “It’s not a simple challenge to take one adhesive and implement it in multiple plants, multiple packaging formats,” says Perkins. “We have to be very competent technically, and that’s one of the things Kraft Foods is expecting from the alliance. We have to do a detailed technical assessment up front to ensure that when we tell Kraft a particular adhesive will run on this line or in that plant, it will. They know we have a lot of feet on the street, a competent technical organization, and the ability to assist their plants in simplifying their processes around the adhesives they use. Equally important, they know we can do it seamlessly without any impact on their operation.”

For Kraft Foods, the proposed agreement will support multiple strategic objectives. “Kraft Foods is committed to doing its part to ensure that we have a diverse workforce and supplier base, be a good steward of the environment, improve our communities, and deliver value to shareholders,” says Julia Brown, senior vice president of Procurement at Kraft Foods. “We believe this initiative with ASI and Henkel will deliver significantly against these commitments.”

The incremental volume from the project with Kraft Foods in North America will allow the ASI-Henkel alliance to bring capital investments and jobs (both technical and administrative) to the Detroit metro area, the hard-hit labor surplus area where ASI is located. “The impact on our company and our community will be substantial,” says Hill. “We will make capital investments and investment in hiring people. We’ll put on a third shift, buy more equipment. We will create employment in a city that sorely needs it.” In fact, ASI has already invested about $350,000-400,000 to expand production levels in their adhesive plant and will expand it even further. “I think it’s safe to say that over the next several years, our investment will be seven figures,” said Hill.

A Model for Corporate America

“The alliance and the Kraft Foods initiative alone won’t solve the employment problem in Michigan,” continues Hill. “But it does present an answer in terms of the way partnerships can come about and the impact they can have on the community. Our hope is that other companies will see value in this model.”

According to Perkins, “The commitment to diversity was one of the key drivers behind the 2008 formation of the ASI-Henkel alliance. The alliance has already been well-received by a number of major consumer-goods companies, and this commitment from Kraft Foods demonstrates the value that ASI and Henkel can bring to the market. At Henkel, we are very excited about the opportunity to work with the Kraft Foods team to bring this grand vision to reality.”

The scope of this project is a testament to Kraft Foods’ broader commitment to diversity, as the company has invested in supplier diversity for more than 25 years. It is likely that other consumer product manufacturers will support the ASI-Henkel alliance and further affirm the industry’s commitment to diversity.

Hill says that, when it comes to a bold vision that accomplishes great value for the customer and an incredible level of diverse supplier development, Kraft Foods is clearly a change agent. “By harnessing the agility and experience of a 15-year minority supplier like ASI and the scale and technology of a global supplier like Henkel, they have formed a strategic alliance that will have an enormous impact.”

According to Perkins, the decision of global food giant Kraft Foods to join forces with the alliance is a pioneering step. “Although they are not the first company to partner with our alliance, Kraft Foods is the first company to take the alliance to the level in which we are aligned with their strategic objectives. We anticipate that they will be the first of several consumer packaged goods manufacturers to benefit from this kind of commitment.”

“We know it will work because it’s already working,” adds Hill. “The initiative between Kraft Foods, ASI and Henkel means growth and jobs in an ethnically diverse community. And it sets an example that corporate America can repeat across other kinds of products in other minority companies.”

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